Helen Torley - President, Chief Executive Officer Al Kildani - Vice President of Investor Relations and Corporate Communications

Ladies and gentlemen, thank you for standing by and welcome to the Halozyme, Fourth Quarter 2019 Financial Results Webcast and Conference Call. At this time all participants’ lines are in a listen-only mode. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]. I would now like to turn the conference over to Al Kildani, Vice President of Investor Relations and Corporate Communications for Halozyme Therapeutics. Mr. Kildani, please begin.

Thank you. Good afternoon and welcome to our fourth quarter and full year 2019 financial results conference call. In addition to our press release issued today after the close, you can find a supplementary slide presentation that will be referenced during today’s call on the Investor Relations section of our website. Leading the call today will be Dr. Helen Torley, Halozyme’s President and Chief Executive Officer, who will provide an update on our business and review our financial results for the fourth quarter and full year 2019. During the call we will be making forward-looking statements. I refer you to our SEC filings for a full listing of the risks and uncertainties. I’ll now turn the call over to Helen.

Thank you, Al. Before providing an update on our recent progress and outlook, I’d like to first comment on the leadership change we’ve just announced. I’m very excited to announce that Elaine Sun has been appointed our new Senior Vice President and Chief Financial Officer, effective March 2. Elaine joined Halozyme with a tremendous background in investment banking having played key roles in strategic and financing transactions valued in excess of $50 billion during her career. Most recently Elaine has served as Chief Financial Officer and Chief Strategy Officer of SutroVax, which is a private biopharmaceutical company developing vaccines to fight infectious diseases. Elaine’s deep knowledge and experience of corporate finance and also in M&A transactions will be of great value as we focus on driving the long-term growth and profitability of Halozyme. I look forward very much to working closely with Elaine and to introducing her to you on our next quarterly call. And I’d also like to just take a moment to thank Laurie for her contributions to Halozyme, and particularly for the key role she played in helping the company through the restructuring over the last few months. We wish Laurie all the best in her next role. I’m now pleased to provide an update on our recent progress and 2020 plan. We’ve completed virtually all of the closeout actions related to our former oncology operations and are now focused solely on our ENHANZE business. The swift repositioning of the company and the decisive cost reduction measures taken, have placed Halozyme on a path to sustainable, near-term profitability with anticipated high growth in revenues, earnings and cash flows expected for the next several years. This makes Halozyme a unique biotechnology company as one of the few combining high-growth potential and the ability to provide a meaningful return…

Yes. [Operator Instructions] And your first question comes from the line of Charles Duncan with Cantor Fitzgerald.

Hi! Helen and Laurie and team, congrats on a great year of progress. I had a couple of questions regarding some of the, I guess guidance, particularly the milestones looking out ‘20 to ‘22. I’m wondering if you could provide any granularity on what comprises those milestones? I know you probably won’t be able to talk about specific numbers associated with certain milestones, but are you expecting both, dara and the fixed-dose combination for Perjeta-Herceptin to be approved here in the near term, as well as what number of the projected Phase 3’s and the one Phase 2 trial start would you anticipate to be approved by the end of ‘22?

Yeah, thanks Charles. With regard to the milestones, the way to think about it is it’s growing because of the increase in maturity of our portfolio and so it is being driven by anticipated product launches and Phase 3 starts as you mentioned, because those tend to be associated with higher milestones. We haven’t provided any specifics, other than we do anticipate the approval for daratumumab in the U.S. and the EU in 2020. For Perjeta-Herceptin, while we do anticipate a U.S. approval at the end of 2020 that is not associated with the milestone. Just as a reminder, we already received the milestone for the HER2 product. But then if we move to our expectations for the year, we are projecting a total of some three Phase 3 starts, one Phase 2 start, and five new Phase 1 starts, many, but not all of which are associated milestones. But it’s that very nice mix from the approvals through the late-stage products to the early stage products over the next several years and the progress we’re going to see with those products that are entering the clinic move into later stage that is driving the very robust projected milestone potential.

That’s helpful. And related to that, would you anticipate – is the base case assumption that you’re making is that DARZALEX SC would be approved just as a reflection of the current approval or could it be approved for a broader label? It would seem to me that ENHANZE could really enable that.

Yeah Charles, I think that’s a question we don’t know the answer to. We certainly know that Janssen submitted the file to include the COLUMBA study, which was in relapsed-refractory patients, but also the PLEIADES study, which included patients who were in the front and second line settings as well. At the RITUXAN HYCELA Oncology Drugs Advisory Committee, the FDA had suggested it may be possible based on smaller studies to be able to get a broader label, but we simply don’t know the answer to that as yet, but I’m certainly hopeful that the FDA is going to allow for a broader label, but we’ll have to wait the FDA decision on that.

Okay, last question quickly. When you think about ‘27 or revenues beyond ‘27, specifically royalty revenues, could you help us think through that, and would it depend on being able to access a new platform or do you think that there is some sustained royalty revenues from the existing enhanced platform beyond ‘27? Thanks.

Yeah. I mean, if I begin just with ENHANZE post-2027, that really is – what the pattern is after ‘27 is going to depend on a number of things, some of which we simply don’t know today. How many new partners we will have signed by then? How many new products are in development and how many new co-formulation patents have been signed, all of which will have the effect to add additional revenue and extend the duration of time of which we would get revenue. So it is very hard to predict exactly what will happen after 2027 with ENHANZE, but I do think what is very clear is even after the expiry of the U.S. patent in 2027, the structure of our contracts together with the potential for co-formulation patents means that we do not anticipate a royalty cliff, and a dramatic reduction in sales immediately. Now, you’re asking about the platform, but indeed it is our strategy to continue to the growth in that ’24, ‘27 to ‘30 time frame. That is exactly what we’ll be looking to find with something to add on that will continue to add to the exciting growth we have with ENHANZE. We obviously are just beginning to look at that. We don’t feel any rush to do that Charles. It’s important that we see the success of ENHANZE and the very rapid growth we expect from that in the next several years, but we will be looking to add something to do exactly what you say, add on to that growth in the ‘24 and onwards years.

And your next question comes from the line of Do Kim with BMO Capital Markets.

Very good afternoon, everyone. This is T.J. [ph] speaking for Do. Congrats on the continued progress. I have a couple of quick questions. The first one is in relation to the operating expense. Do you view that growing in correlation with the increased number of partnerships? Is there some type of expected growth rate that we can imply in our models or do you think it’s going to be pretty flat moving forward, given that you’ve had this restructuring completed or near completion? And then my second question is in relation to some of the economics of the royalties and milestones. Do you foresee that in the future increasing, as in being able to attain higher milestone upfront payments as opposed to kind of what you’ve been averaging over the past few years? Thank you.

Yeah, thanks for those questions. With regard to the ENHANZE business model, what is terrific about it is how leverageable it is. If you recall a couple of calls ago, I did an illustration of that and where the majority of our expenses come from are our internal experts. Our teams who support the alliance partners, and because they support partners at different stages, they can move in and out of programs and across partners and so this is what makes our business so leverageable. So we do anticipate that as we – in the near term as we contemplate the expended number of partners and the number of programs, we will not need to increase our expenses. If we do happen to have a large increase in the number of partners and programs, we would have to modestly need to add a few people. But you could think about that $65 billion to $75 million expense range I gave you as certainly being in place for the near term based on our current projections for growth. With regard to the structure of the upcoming agreements that we may sign, we do feel that with the current structure we have, where we receive in general as an example, $30 million as an upfront for a single target, $160 million in milestones and then the mid-single digit royalties, is going to be the ongoing range. We saw a big step change in the value of our contracts in 2014 into 2015 after we had demonstrated commercial and regulatory success and we’re very happy with the value we get with our current partners and obviously it’s resulting in the very exciting financial picture for the company. So I would think about it as being in a similar range to what we’ve seen with the last several contracts, examples including argenx and Alexion.

Your next question comes from the line of Jason Butler with JMP Securities.

Hi, thanks for taking the question. Just one on the J&J program. Can you just give us a little bit more background on where the product – the candidate is in development and the path forward from here with ENHANZE? And then just more broadly speaking, any technical considerations when using the technology with the bispecific antibody versus a monoclonal? Thanks.

Yeah, thank you. Jason, unfortunately we’re not in a position just based on Janssen not really have talked much about this program to be able to provide any details on its development or anything else at this point in time. Please look for us to provide updates as Janssen is making some progress with it and is providing updates to us.

Your next question comes from the line of Jim Birchenough with Wells Fargo.

Yes, hi guys. Congrats on all the progress! I guess a couple of questions. The first is just on Elaine’s hire. Could you maybe just comment, it seems like with her background that might be indicative of more deal making going forward, and so could you maybe confirm that? And I guess the second related part is, when you talk about accessing other technologies to support growth longer term in high-margin technology platforms, what’s your sensitivity to those deals being accretive or at least not dilutive, because I think there’s some concern that you might do a dilutive deal?

Yeah, and thanks Jim for that. If I can talk about Elaine first, I mean obviously with her strong investment banking experience, she has got deal experience. Now equally what I found was that she is a highly strategic CFO, with a great deal of insights on capital markets. And as we think about the future picture of Halozyme with our expectations for increasing free cash flow, it is as much that a focus we have on identifying the right capital return and evolving our capital return plan that I hired Elaine for as an M&A deal experience. So earlier I mentioned that near term we’re very focused on ENHANZE, having someone of her deal experience will ofcourse be very helpful, but I think about it being as much a focus on the capital return as it is on the deal side of things. You know good question, Jim. We focused on the new deal wanting it to have a strong impact on the top line growth. We obviously are going to be very sensitive to the impact on the earnings growth as well. So we’ll be looking at both of those factors as we contemplate bringing in the digital platform to increase the value of Halozyme and the return for our shareholders.

And then maybe just one more question, sort of following on an earlier question about the tail beyond 2027. Can you say if you’ve filed or your partners have filed per co-formulation patents? Are there any pending that we should be aware of, and what’s the strategy there overall when we think about the portfolio? Do you have a potential strategy for each co-formulated asset?

Yeah, we don’t have any pending co-formulation patents at this point in time, Jim. We do have a team who works with each of our partners to discuss the potential points of novelty that are being identified either in the Phase I study or in the clinical studies, and work with them for them to submit the patent applications and so… I think I may have mentioned, maybe last year it was, we brought in an outside law firm to just brainstorm all of the different points of differentiation that could be considered novel, and there’s a wide range of them that go from pharmacokinetic factors to pharmacodynamic factors to safety and to efficacy. If there is any new insight in any of those that is unexpected, those are potentially fileable. So what I’m excited to say is there are a broad range of potential reasons. What we are doing now is that we are working with our partners to see is the data supporting those and we will work closely with the partners to encourage them to get those patents filed. So I’m confident we will develop more co-formulation patents. We have none filed at this point in time.

Great! Thanks for taking the questions.

Thank you.

Your next question comes from the line of Jessica Fye with JP Morgan.

Hey guys, good afternoon. Thanks for taking my questions. First one is just on, up to $150 million of share repo plan for 2020. I realize it’s early in the year, but why not get started on that sooner is question number one. And then next one, just a simple modeling question. I know rHuPH20 supply sales can be sort of variable quarter-to-quarter. Anything we should be thinking about for Q1 and Q2 as it relates to just that quarterly cadence?

Alright, we are getting started with the $150 million repurchase shortly Jess. What we needed to do was finish the accelerated share repurchase program, which just finished in mid-February. And so that was the gate for us being able to start the next time share repurchase. With regard to the API, it is I know quite hard to model, because it does differ quarter-to-quarter. I think what we can say is, it is going to be lower this year than it was last year and you can see from our expenses, the range it was, and will probably be a bit more toward the second half of the year than the first half of the year, but we don’t as you know give quarter-by-quarter guidance, but hopefully that will be some just helpful direction for your modeling.

Great! Thank you.

Next question comes from the line of Graig Suvannavejh with Goldman Sachs.

Hey, good afternoon. Thanks for taking my questions. Congrats on all the progress! I think I’ve got two questions and maybe piggybacking on Jess’s question, but maybe more on the expense side of things. In terms of that quarterly flow, and this may have been asked before, I might have missed it, but will that be relatively stable throughout the four quarters? So that’s kind of my first question. And then perhaps on my second question, which has to do with the communication of new trial starts by partners. Is your current strategy really to provide those in these quarterly updates or do you envision that these might be separate stand-alone press releases? Thanks.

Hi! Thanks Graig. With regard to the expenses, you are going to see a decline quarter-on-quarter through the year until we hit that run rate that we’ve given of $65 million to $75 million by the fourth quarter. So that would be an annualized run rate of $65 million to $75 million in the fourth quarter. So you can triangulate from last year down to that as we’ve closed out our programs. And with regards to trial starts, it’s an interesting thing. With our partners, often we’re finding, and this is an exciting change in how the partners are [Inaudible], these are competitive areas. So wanting to start these studies for competitive differentiation, and they want to keep the information that they’re doing the study quiet and secret for as long as possible. But I would say that generally, that you will get the first notice of a trial start if it’s in a patient population on clinicaltrials.gov. It tends to be just before the study has started and once that is public in that setting, we’re able to talk about it. If it’s normal volunteer study, I will say that does not have to be posted. For example, for a Phase I study, we may not be able to talk about that. So to answer your question specifically, Graig, if there’s a milestone, we sometimes do a press release, but not always. We certainly will do a summary on our quarterly calls to let you know the seats-of-play for everything that’s happened in that quarter that we’re able to talk about.

Okay, thank you very much again. Congrats on the progress!

Thanks Graig.

Your next question comes from the line of Joe Catanzaro with Piper Sandler.

Hey, thanks guys, thanks for taking the questions. Just two quick ones from me. Maybe the first one on guidance as it relates to royalty revenues and your projections that they’ll decline modestly in 2020, does that consider any potential expected approvals in 2020 or does it just consider currently approved products? And then my second question following up on the bispecific question asked earlier, more as it relates to the ENHANZE platform, does the ENHANZE platform have utility just with bispecific formats that have IGG, PK-like properties or does it extend across the broad spectrum of bispecific formats? Thanks.

Yeah. On the first question Joe, we did – for the royalty revenues we have a modest decline of the continued impact on the Roche product and we have the beginning of royalty revenues starting with daratumumab. At the time we did the projection, obviously we don’t know what the exact date of approval and we know that certain mechanical things happened in the first month after approval, but we do have a modest amount of sales in for daratumumab, but nothing for Perjeta-Herceptin. And with regard to bispecific, I’ll have to get back to you on that. I don’t know if I have the complete answer to that Joe, and I prefer to check in with our Chief Technical Officer and I will get back to you with the answer to that question.

Okay, perfect! Thanks for taking my questions.

Okay, thank you.

Your next question comes from the line of Joel Beatty with Citi.

Hi, thanks for taking the questions. First one is about technology search. Can you help give a sense of, it’s limited to maybe more narrowly to the technology that would improve upon ENHANZE as its approaching expiry, you know still several years away in 2027 or is the search kind of more broad about any type of technology that might be useful for your pharma partners?

Yeah, it is a broad search Joel, where we’re looking for a profile that from a financial perspective as we’ve discussed, is able to add to our revenue growth without having a strong impact on our overall picture. And as we started the search there, that could be technology platform; it could be a new science that is also something we could license to companies. And so as we’ve begun looking, there is actually a wide array of things there. But what we’re most focused on is having something with a similar profile to ENHANZE, where we can have a high-margin and high growth business that will benefit both our top line without having a lot of impact on the EPS profile. So still early days for us. We are mostly focused on delivering on the ENHANZE promise near term, where we see a lot of near-term growth, but we are opportunistically beginning to look at finding the right type of platform to add.

Great! Thanks. And then maybe one other question on ENHANZE in the 10 ongoing Phase I trials that are expected by the end of the year. Can you help give a sense of what a typical time line for those trials might be? And then also you know if those Phase I trials are successful, where could that leave the agents? Would they go into maybe a smaller Phase II trial or could some of them go straight into pivotal trials?

Yeah, we’re seeing an evolution in the development program for ENHANZE and let me answer your first question first. For Phase I, the fastest we’ve seen a company do a Phase I was actually Argenx who started their Phase I study in July and reported the data in December. But I would say it’s a bit more normal for that to be about a year roughly long process for the companies to complete their Phase I study, so 12 months for that. If the company is bridging to an already approved product, they will go straight into Phase III program and do generally a non-inferiority study to demonstrate that PK parameter and efficacy are non-inferior between the subcu and the IV. If this is more of a novel development approach, where there is no large database to bridge to, the companies can do at Phase II. And what we’re seeing more and more is they’re doing a seamless Phase II to Phase III as Argenx is talking about, where they have an initial part of the study, which is more Phase II, generating more efficacy and safety data at a specific dose and then expanding on a cohort to make that into a Phase III study. All of this obviously shortening the time lines as there aren’t causes between the different phases of the studies and also not causing to have to go and visit with the FDA for an end of Phase II meeting as an example. So we’ve seen some very nice designs that are being sorted out and discussed with the FDA that are resulting in a much shorter timeline than we’ve traditionally seen. To-date, the products have been approved have been five years from first in human to approval. That’s quite a short period of time, but I think with the discussions that are happening today, we’re going to be able to knock one or even two years off that in the future. So very exciting changes happening, which I think is coming obviously from increased comfort with PH20 and the large safety databases we now have about the combination of our rHuPH20 with a range of different products.

Your next question comes from the line of Gena Wang with Barclays.

Thank you for taking my questions. Two regarding the 2020 guidance. The first one is royalty. I think according to the slides Helen, you also mentioned the royalty would decline modestly. Does that mean the royalty will be lowered than $70 million, and how much daratumumab subcu contribution to this? are we talking about $5 million to $10 million?

Yeah, it will be we think modestly lower than the $70 million, which was the royalty revenues in 2019. We haven’t given any specifics for daratumumab in terms of how much is there, but the factors to consider really are the timing of the approval and importantly for any U.S. launch, there is always a period of time where you want to be sure you’re getting your reimbursement in place, you’re on the electronic medical records and you’re on the formularies. And so with the mid-2020 approval, we actually see there will be just a few months of full access in sales, and we really see 2021 as being the year where we expect to see the exciting inflection point based on daratumumab uptake once all of that is in place. So, we have a modest amount of sales in for 2020 in our projections.

So for 2021, daratumumab, you know what will be the assumption for the conversion for IV to subcu?

Yeah, we haven’t given that in detail. I know different people have provided that. I mean when we think about the value proposition for patients, many patients require four to six hours for the IV. We’re going to be able to deliver in five minutes subcu. I think that’s a very strong value proposition. In addition, we know there is capacity constraints in the infusion suites, as well as nursing constraints, so we do think there will be an exciting uptake, but we’re not giving any specific numbers, but this is a very strong value proposition.

Your next question comes from the line of Arlinda Lee with Canaccord. Ms. Lee, your line is open. If you’re on mute, please unmute your phone.

Hi. Can you hear me now?

Yes.

Okay, sorry about that. This is Ben for Arlinda. Just had a quick question on the second quarter sustainable profitability guidance. I’m sorry if this was covered before, but just looking at your receivables, it looks like you have quite a bit of I guess receivables from product sales to collaborators as opposed to, let’s say receivables from collaborative milestones. Is that something that we should look at in terms of flushing out the second quarter?

You know, I’m going to get back to you on that. I don’t have the details in front of me at this point in time, but let us get back to you on that question.

Okay, that’s pretty much all I have. Thank you.

Alright, thank you.

And there are no other questions. I would like to turn the call back to Helen for any closing remarks.

Yeah, thank you everybody. Thank you very much for joining us for the call today. As you can see, we have a terrific picture of events for 2020 for the Halozyme based on the strong momentum our partners are making toward future product approvals, as well as advancing in late-stage clinical development. We appreciate your time today. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.